Derivative Action Law and Legal Definition

A derivative action/suit, more popularly known as a Stockholder's Derivative Suit, is a lawsuit brought by a shareholder of a Corporation on behalf of the Corporation to enforce or defend a legal right or claim. Such a suit is brought against insiders i.e., the directors, management and/or other shareholders of the corporation and the suit often involves fraud, mismanagement, self-dealing or dishonesty that are either perpetrated or ignored by officers and Board of Directors of a Corporation. In effect, the suing shareholder claims to be acting on behalf of the corporation, because the directors and management are failing to exercise their authority for the benefit of the company and all of its shareholders. Derivative suits permit a shareholder to bring an action in the name of the corporation against the parties allegedly causing harm to the corporation. If the directors, officers, or employees of the corporation are not willing to file an action, a shareholder may first petition them to proceed. If such petition fails, the shareholder may take it upon himself to bring an action on behalf of the corporation. Any proceeds of a successful action are awarded to the corporation and not to the individual shareholders that initiate the action. In most jurisdictions, a shareholder must satisfy various requirements to prove that he has a valid standing before being allowed to proceed. The law may require the shareholder to meet qualifications such as the minimum value of the shares and the duration of holding such shares by the shareholder.